Russia Tinkers With Fixes, but Economic Woes Are Deep

Yeltsin cut the budget, named new tax chief Friday to stem fiscal crisis. Analysts say it won't be enough.

By
Jean MacKenzie, Special to The Christian Science Monitor /
June 1, 1998

MOSCOW

Russia, rocked by a series of financial disasters, is taking steps to put its house in order. But analysts expect systemic economic problems and an uneasy political situation, dominated by the ambiguous and contradictory figure of President Boris Yeltsin, to send the country lurching from crisis to crisis unless major changes are made.

The news on the economic front could hardly be worse. After share prices on domestic stock markets slid more than 40 percent in May alone, a major international credit-rating agency downgraded Russia, putting the world's largest and potentially one of its richest countries on the same level as Turkey.

The government on Friday announced sharp cuts in the 1998 budget, trying desperately to find funds to meet its debt obligations. Mr. Yeltsin also fired the head of the tax service, installing in his place Boris Fyodorov, a former finance minister who is itching to whip Russia's notoriously inefficient tax system into shape. To bolster the effort, Yeltsin has signed a decree giving tax police sweeping new powers to go after tax dodgers and confiscate their property.

On Saturday, Moscow tax squads took advantage of their beefed-up authority to stage raids on some of the capital's most corrupt centers of enterprise, the outdoor bazaars that sell everything from children's toys to washing machines. One tax official was quoted as saying the day's activities would pour up to 1 million rubles ($166,000) into state coffers - but this sum will not go far to stem Russia's deepening financial woes.

The reasons for the crisis lie deep within Russia's economic and political structures. The new system was built on what is commonly called "crony capitalism," in which a few well-placed financiers reaped most of the benefits of a hasty and corrupt privatization in the early 1990s. Economic production is low, the banking system is shaky, and the commodities market, based largely on energy, is depressed and getting worse.

A worldwide slump in oil prices has been exacerbated in Russia by inefficiency and corruption in the oil sector. A series of coal miners' strikes in May highlighted even more severe problems in that area. The stock of Russia's major electrical company, United Energy Systems, was damaged last week when parliament passed a law limiting foreign ownership of energy companies to 25 percent, in spite of the fact that UES is already 30 percent foreign-controlled.

Against this background, the Asian stock market crash last autumn hit Russia especially hard. And Indonesia's turmoil in early May sent the country's whole system tumbling. Russia is counting on a bailout from international financial organizations, but so far the International Monetary Fund has held firm against new loans. While the IMF is prepared to help by releasing an installment of an already approved loan later this month, the $670 million will not be enough to stop Russia's downward spiral.

Nevertheless, Sergei Markov, head of Moscow's Institute of Political Studies, says the international clout of Russian financial gurus such as former First Deputy Prime Minister Anatoly Chubais will save the day in the end: "The international financial institutions will help, because the consequences of an economic and political catastrophe in Russia would be too great. And [Mr. Chubais] has tremendous authority with these institutions."

Widely heralded as the architect of Russian reform, Chubais does have great popularity in the West. He now heads UES, and flew to Washington last week for top-level meetings with US government officials. Although he has denied that he is looking for cash, rumors continue to fly that he is using his influence to get help for Russia. But Russia cannot count on a timely bailout, says Andrei Piontkowsky, director of Moscow's Institute of Strategic Studies. "I am convinced that they will not give the kind of help that we would need, like the [bailout package] that they gave Indonesia. The entire economy is in trouble," he says.

The problems may only deepen over coming months, analysts say. Russia's already unrealistic budget will be knocked completely out of kilter by the exorbitant rates on treasury bonds the government has posted to keep nervous investors in the market. From 30 percent in March, treasury bill yields have jumped to close to 90 percent, and will cause a mammoth payments crisis when the new bonds come due in nine months. Benchmark interest rates are up to 150 percent, and the government spent $1.5 billion last week to defend its beleaguered currency.

Devaluation 'unacceptable'

Pressure is mounting to devalue the ruble, but this would trigger inflation and cause a highly undesirable popular backlash. "Devaluation is completely unacceptable to Yeltsin," says Mr. Piontkowsky. "A stable ruble and low inflation are all he has to show for 8 years of reform. If he retreats from this, there will be enormous pressure on him to leave the scene."

Mr. Markov agrees. "Yeltsin has obviously decided to run again for president. All his actions must be seen in this context. He cannot risk devaluing the ruble," he says. Yeltsin's second term expires in 2000. Although limited by Russia's Constitution to two terms in office, he has found a legal loophole that may allow him to run again.

While those at the top struggle to comprehend the full scale of the disaster, the man in the street remains largely indifferent.

"What crisis?" laughs Sasha, a Moscow cab driver. "This is a country of great experiments. I am no longer surprised by anything. If aliens were to land on Red Square I would not blink an eye. Anything can happen here."